Reference no: EM133337259

Case Study: Elekta Manufacturing, Inc. is presently operating at 50% of practical capacity producing about 50,000 units annually of a patented electronic component. Elekta recently received an offer from a company in Paranaque, Metro Manila, to purchase 30,000 components at P6.00 per unit, in Elekta's plant. Elekta has not previously sold components in Paranaque. Budgeted production costs for 50,000 and 80,000 units of output follows:

Units 50,000 80,000

Costs:

Direct Materials P75,000 P120,000

Direct Labor 75,000 120,000

Factory Overhead 200,000 260,000

Total Costs P350,000 P500,000

Cost Per Unit P7.00 P6.25

The sales manager thinks the order should be accepted, even if it results in a loss of P1.00 per unit because he feels the sales may build up future markets. The production manager does not wish to have the order accepted primarily because the order would show a loss of P0.25 per unit when computed on the new average unit cost. The cost accountant has made a quick computation indicating that accepting the order will actually increase gross profit.

Question 1: Explain what apparently caused the drop in cost from P7.00 per unit to P6.25 per unit when budgeted production increased from 50,000 to 80,000 units.

B1. Explain whether (either or both) the production manager of the treasurer is correct in his reasoning.

B2. Explain why the conclusions of the production manager and the treasurer differ.

Question 2: Explain why each of the following may affect the decision to accept or reject the special order.

C1. The likelihood of repeat sales and/or all sales to be made at P6.00 per unit.

C2. Whether the sales are made to customers operating in two separate, isolated marks or whether the sales are made to customers competing in the same market.